China Employment Contracts. Ten Things To Consider.

I love it when a ready-to-go post is delivered to my in-box, without my even having to ask. This morning, I received from Steve in Qingdao a carbon copy of an email he had sent to a software client of ours for whom we just started working on their China labor law issues after having registered their WFOE. The email is from Steve to the client explaining the various labor documents he prepared for them, including most particularly, a China Employment Contract, but it serves as a great introduction to many of the key differences between China’s employment laws and those of the United States.

Here’s the email:

As you will see, the Chinese employment system is based on Asian socialist and Northern European models. China’s employment law system is quite different from the U.S system. The main difference is that the U.S. is an employment at will system, which means you can terminate employees at any time for pretty much any reason. China’s system is the opposite. The Chinese system is a contract employment system. This means all employees must be engaged pursuant to a written employment contract and during the term of that contract, it is very difficult to terminate an employee. An employee can only be terminated for cause and cause must be clearly proved. This means the employer must maintain a detailed set of rules and regulations and must maintain careful discipline records to be able to establish grounds for dismissal. This whole situation makes the employment relationship and the employment documents much more adversarial than is customary in the U.S. You will find that the “tone” of the documents I am sending you is not consistent with your normal “team” approach to dealing with employment issues.

You should also note that China does not really have the concept of a “salaried” employee. The Chinese work week is 40 hours and overtime must be paid for work exceeding the 40 hour limit. I know this approach is very foreign to software/service businesses like yours. However, there are no exceptions to this rule.

I will be sending you set of preliminary documents to review. At this time, please consider the following issues:

1. Term of employment. As noted above, each employee must be hired pursuant to the terms of a written contract. After the initial contract term expires, you may re-hire the employee pursuant to a second fixed term contract. However, at the end of that fixed term the employee automatically will be converted into a employee with an open contract term. This means you have only one chance to hire an employee on a fixed term basis.

Due to the above considerations, determining the length of the initial employment term is critical. We recommend an initial term of three years. This has two benefits. First, it allows you to provide a six month probationary period, during which time you can terminate an employee for any reason. This gives adequate time to test the basic skills of an employee. Second, it delays the onset of the open term period for a period long enough to allow you to determine whether you wish to allow an employee to convert to the open term status.

Of course, you are free to specify any term you feel is appropriate.

2. Salary. You will need to provide a salary, of course. We will then need to convert that into an hourly wage.

One issue here is that in many parts of China, it is customary to pay the salary on a 13 month basis, with the final month paid just prior to the Chinese New Year. This is completely optional, but it is important to state clearly whether or not you will be using this approach. Many employees just expect this “New Year’s Bonus” and a failure to pay it (if expected) can cause many problems.

3. Bonus. If you plan to have a bonus system for your employees, we should set this out.

4. Vacation. The statutory rule on vacation for employees is as follows:

First year: No vacation.
Years 2 through 9: 5 days.
Years 10 through 19: 10 days
20 years or more: 15 days.

If you want to provide more vacation time than set forth above, we will need to specify.

5. Other benefits. If you plan to provide benefits beyond the statutory minimum (set out in the rules and regulations provided), we will need to specify that. If you want to provide a particular benefit to all of your employees, we should put it in your rules and regulations. If you want to provide employee specific benefits, we will include them in the specific employment contract.

For example, China requires employees pay a portion of the employment taxes/fees. Some employers pay that portion for the employee as an additional benefit.

6. On site security. As you will see, the Rules and Regulations have a detailed section regarding on site security. If there are things that should be modified or added, please let us know. In addition, for a company like yours, you should adopt formal policies on data and information security. I am sure you do this elsewhere, so use of the same policies in China should not be a problem. Please get those to me though so we can put them into Chinese with everything else.

7. Travel. If your employees will travel domestically or internationally, you should have a written travel expense policy.

8. Trade Secrets/IP Protection. The documents include a separate Trade Secret and IP protection agreement. This is designed to work for software companies like yours. If there are additional features we should add, please advise.

9. Training. Will you be providing training for your employees? If yes, we should also develop a training agreement. Please advise.

10. Sign Off Agreement. Note that we have added a “Sign Off Agreement.” With this agreement, the employee acknowledges having received the rules and regulations and agrees to abide by those rules. It is important to get your employees to sign this so they cannot later claim not to have received it, which claim is frequently made at labor arbitration in China.

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.